St Louis, MO · Member since 2018 · 38 posts · 14 votes
So I am working on this project that once I am done will be cash flowing around $5000 per month after all expenses are paid. I want to quit 9-5 and become full time RE investor. I plan on property managing myself as all these units are brand new and will not need much maintenance. My question is will this be taxed as passive income? and what is the best way to pay myself a salary to live off of? weekly? monthly?
You leave us guessing what is "this project." My guess is that you're rehabbing a small multi-unit property which will be rented.
If my guess is correct - you do not need to pay yourself salary. Your income will be taxed as regular passive income, and you can transfer money out of your business bank account to your personal bank account anytime, probably monthly. The transfers do not create any additional taxes.
Yes, you could also structure it in a more complicated way, with an actual salary, but you need a good reason to do so, which is a longer conversation.
You leave us guessing what is "this project." My guess is that you're rehabbing a small multi-unit property which will be rented.
If my guess is correct - you do not need to pay yourself salary. Your income will be taxed as regular passive income, and you can transfer money out of your business bank account to your personal bank account anytime, probably monthly. The transfers do not create any additional taxes.
Yes, you could also structure it in a more complicated way, with an actual salary, but you need a good reason to do so, which is a longer conversation.
Tax CPA · Charlotte, NC · Member since 2014 · 215 posts · 186 votes
8y
@Dustin Awtrey@Michael Plaks said it best. Assuming this is rental income, the entire net rental income will be taxed allowing you the freedom to pull cash out or put cash in without any other tax implications.
All assuming your scenario and the facts presented here.
I think @Michael Plaks and @Account Closed gave you the easiest, simplest, most tax expedient, best way to do it.
Howeve, You may want to take a small salary to make sure you can get social security and Medicare if it’s still around when you are eligible. Some real estate investors do not get SS and Medicare because they never paid into it. However you are fined by the govt for not being on Medicare and insurance companies won’t cover you for expenses that Medicare should pay. You need to pay SSMED for 10 years or 40 quarters to be eligible.
i keep reading different articles about active and passive income, you say this will be passive, what would constitute it as active?
The simplest way to explain is: active is where you continuously contribute labor (Realtor, contractor, wholesaler, flipper); passive is where the money is made while you're doing something else (landlord)
CPA · Miami, FL · Member since 2015 · 132 posts · 83 votes
8y
@Dustin Awtrey, One piece of advice is to keep one bank account for your project. Remember to use this bank account for business expenses such as meals, car repairs, gas, tolls, business travel, home office expenses, and other items used in your business (i.e., iPad, laptop, etc.).
St Louis, MO · Member since 2018 · 38 posts · 14 votes
8y
Thats what i was curious on, i do plan on quitting w2 and flipping and developing new projects full time, but will profit from my rentals still be passive?
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
8y
@Tammy Graham Not an accountant here, though have talked lots about this with our accountant and lawyer and other pros to make sure we get this right
There are a few bars to cross to change rental income/losses from passive into active so and its very easy to get tripped up.
The first bar: You have to be a "real estate professional" which means you need 750 hours of real estate activity. You can tie multiple properties and activities together to meet this test, but that alone won't necessarily allow you to turn passive losses into active, it merely changes the presumption that they are passive
2nd bar: You have to show you are actively engaged in rental activity/property management for at least 500 hours in the year. Financiing, brokering, acquisition etc. won't count towards this number.
3rd bar: Need to keep records of time and activity to document his status
If he meets these tests then he should be able to actively put losses against other taxable income
Pros on here....please correct if any of this is misleading.
St Louis, MO · Member since 2018 · 38 posts · 14 votes
8y
i am wanting this income to be taxed passively, so i can avoid self employment tax. when cash flow starts coming in is when i will transition into full time real estate investing. i.e. flipping, buying raw land and developing, etc. doing most of the work myself having been in the construction trade for the last 20 years. would that put me as a real estate professional? or will my rental profits still be taxed passively?